Obama Retirement-Savings Plan

Why You Don't Want Any Part Of The Obama(k)

In his most recent State of the Union Speech, President Obama expressed his intentions to do for retirement savings what the Affordable Care Act did for healthcare in our country. That’s right: Move over, 401(k). It’s time for the Obama(k). So for a fee you can’t afford, you can have access to a website that doesn’t work to give you benefits you don’t need. If you like your Large Cap Growth Fund, you can keep Your Large Cap Growth Fund. Period.

All cynicism aside, the President’s proposal has some merit and does address a glaring problem. Generally, most Americans feel underprepared when it comes to retirement planning. And low-income Americans are almost entirely dependent on government programs in their retirement years — Social Security, Medicare and/or Medicaid, etc. For them, a small nest egg in retirement might go a long way towards paying utility bills, putting a few extra items in the cupboard, or buying an extra gift or two for grandkids during the holidays. If, with minimal government regulation and cost, the government can encourage reluctant savers to save, there’s no reason not to try.

They’re actually calling it the MyRA, and, in broad terms, it looks like a fine program. But it’s not something you should want to take advantage of. Here’s why:

Only You Can Deal with Your Retirement Saving Pre-Existing Condition

One of the glaring problems with the healthcare system in our country dealt with people who had pre-exising medical conditions (diabetes, cancer, etc.) that prevented them from getting health insurance or obtaining quality, affordable health care. One of the provisions of the Affordable Care Act prevents insurance companies from denying people insurance coverage because they suffer from one of these conditions.

So what’s the equivalent of a pre-existing condition for retirement savings? Your bills. Your debts. Your monthly financial obligations. Some of them are never going away, like your housing costs, groceries, transportation costs, etc. But the consumer debts and student loan debts must be dealt with before you can start funding your retirement accounts to a satisfactory level. You might be a big admirer of President Obama. And maybe you have even higher hopes for President Rodham Clinton. But neither one is going to pay off your debts for you. Only you can do that. So you need to aggressively attack that task today.

$25 Isn’t Enough

This new MyRA will allow workers to open up a retirement account with as little as $25. Subsequently, contributions can be made via payroll deduction for as little as $5. Fund your retirement at that level for 30 straight years without interruption and you’ll have enough to eat breakfast at the Waffle House for a whole week.

Of course, the thinking behind setting these thresholds so low is to get people who are doing absolutely nothing right now to start doing something. Sometimes if you nudge people in the right direction, they’ll pick up speed and strength all on their own and really embrace the concept of forgoing consumption today to invest in their future. So $25 is better than $0, but it’s still not enough. You’re better served by focusing on a percentage of your pre-tax salary rather than a specific dollar amount. If you’re not saving anything right now and you think you can’t afford to, at least sign up to contribute 1% of your pay. Then try to increase your contributions a little bit at a time, even if it’s only 1% per year. Right now, if you are saddled with high-interest or student loan debt, you need to focus on paying that off while gradually increasing your retirement plan contributions until you get to 10% or more of your pre-tax income.

One Investment Option Does Not A Diversified Portfolio Make

The new Obama(k) will provide one, and only one, investment option: a government bond fund that will guarantee one’s principal. The 10-year average return for that fund is 3.61%. The long-term average inflation rate is a little over 3%, which means that you’re barely making 0.61% on your money under those conditions.